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Russia’s Economic Future Uncertain

Around a year ago, Russia announced its anti-crisis program in response to a recession that looked to rival the 2008-2009 Great Recession. Drops in oil price, years of economic sanctions and continuing corruption culminated with the collapse of the ruble in 2014.

As the one-year program draws to a close, Russian officials are claiming it looks as if the plan has been successful and Russia will escape its recession. Yet the program initially raised doubts as economic analysts criticized it for sticking with the old measure of just pouring money on the economy, blog.chron reported.

It may be easy to denounce Russian claims as propaganda, but there may be some truth in these statements. When the plan was announced, President Vladimir Putin and Prime Minister Dmitry Medvedev pledged to cut budget expenditures by 10%, but with no changes in defense and agricultural spending. Instead, Putin promised the 2.3 trillion rubles ($29.9 billion) aimed toward macroeconomic stability would support fostering small businesses and import substitutions.

Businesses were promised more freedom, and the government pushed toward replacing imports with Russian-made goods. The damaged banking system would be improved through the use of a “bad bank” and recapitalization. The “bad banks” would remove troublesome assets from Russian banks, allowing them to regain their footing.

Devaluation Helped

Surprisingly, the devaluation of the ruble has actually helped some industries in Russia. Many of the industries export their goods in currency other than the ruble. So as the ruble devalued and manufacturers’ production costs decreased compared to the rest of the world, they were then able to sell their goods in a currency valued higher than the ruble.

That’s not to say the sanctions aren’t damaging, as they have allegedly stripped Russia of a quarter of its cash holdings. However, while the damage caused is great, it is likely not enough to force Russia to make any changes.

Medvedev recently stated he expects inflation to be brought down to 6.4% in 2016. Some US agencies rated Russian government bonds as stable due to the stabilization of external finances within Russia. Yet others claim the economy is still deteriorating.

It can be hard to discover the truth in these statements, as each side has something to gain with their forecasts. By making optimistic predictions about a fall in inflation, Russia not only attempts to appear strong and sturdy in the eyes of the rest of the world but would also gain from a favorable inflation shock.